3/12/2012

Germany sides with the tax havens in transparency fight

Germany has long been a champion of financial transparency in Europe, having pushed hard for the EU Savings Tax Directive, a co-operative arrangement since 2005 where participating jurisdictions routinely exchange information about the income and holdings of each other’s citizens, so that they may be taxed properly. Germany has also strongly supported current moves to strengthen the directive, which is currently full of loopholes.

The transparency project has faced major political difficulties. A group of tax haven countries, led by Switzerland and supported inside the EU by the tax havens of Austria and Luxembourg, have been involved in a political chess game, to sabotage the progress of the powerful Amendments to the EU Savings Tax Directive (EUSTD) through the European legislative process.

For a long time, Germany had been a stalwart supporter for those determined to fight for financial transparency, and to fight against the tax havens.

Until now.

As my last post noted, Germany appears decisively to have switched sides, and now has placed itself firmly on the side of the tax havens. As Europolitics reports, confirming my earlier post:

“An unnatural alliance has been made at the Council to block, once again, any move forward in the dossier on the taxation of savings income. Germany has joined forces with Luxembourg and Austria.”

The key tool that is being used to sabotage the Amendments has been Switzerland’s bilateral “Rubik” deals with the UK and Germany, under which Switzerland is supposed to apply some withholding taxes on UK (criminal) German and UK taxpayers’ Swiss assets and income, while keeping their identities secret.

The original political aim of Rubik was to play a divide-and-rule game in Europe, weakening German and British resolve on pushing forwards the EUSTD Amendments, and providing Austria and Luxembourg with a pretext for blocking progress on those amendments: they would be able to claim that the Amendments are unfair because the Rubik bilateral deals give special treatment to Switzerland. Which they do. Germany, inexplicably, wants the EC to drop its objections to the deals.

Switzerland has also been thumbing its nose at the European Union over this issue. Last November, for instance, Swiss Finance Minister Eveline Widmer-Schlumpf snubbed EU Tax Commissioner Algirdas Semeta by cancelling a meeting with him on this issue, at the last minute.

The European Commission has, quite rightly, stamped down hard on the Swiss “Rubik” deals. In a fierce March 5th letter to the Danish EU Presidency, Semeta warned strongly against the deals, warning that

“Such agreements must not include any aspects which overlap with areas in which common action by the European Union has been taken or is envisaged.

Those words “or is envisaged” are particularly important: the deals must not cross the Amendments, even though these Amendments, which are a welcome threat to financial secrecy in Europe, have not yet been passed.

As my earlier post explained, the carve-out that the European Commission insists upon effectively renders the Rubik deals functionally worthless, and pointless except for one thing: as a potent political tool for sabotaging the amendments.

This is why it is so shocking that just at a moment when progress was about to be made – Britain and Germany being made to realise that their deals would have to be scrapped or rendered useless, and Austria and Luxembourg appearing to back down from blocking progress – Germany suddenly intervened to block progress. As Europolitics reports:

The Danish Presidency of the EU confirmed, on 7 March, during a meeting of the Committee of Permanent Representatives (Coreper), that the discussion on savings taxation has been withdrawn from the 13 March Ecofin Council. Copenhagen had hoped to reach a compromise on granting the European Commission a negotiating mandate with several countries, including Switzerland, but Germany has put a ‘reservation’ on this approach.

There are several theories circulating as to why Germany want to do this.

A first is that wealthy and powerful (criminal) German tax evaders have been able to apply enough influence to stop financial transparency being expanded in Europe, and have been able to influence the German Finance Ministry. The theory is not so very far-fetched: many were surprised to see Germany ranked in the top ten of the Tax Justice Network’s Financial Secrecy Index last year.

A second theory is that German Finance Minister Wolfgang Schäuble, who is known to be very pro-Swiss, wants to help Switzerland, for particular reasons of his own. Bizarrely, Germany seems particularly eager to help Swiss banks, as Europolitics continued:

“In particular, Berlin wants the guarantee that is has the right to “facilitate” the access of Swiss operators to its national market of financial services.”

A third possible reason is this: by trying to force the European Commission into accepting the deals, Schäuble will be able to avoid the humiliating experience of having to admit the truth: that the Rubik deals were a gigantic mistake from the beginning.

Ultimately, Schäuble’s motivations may stem from a combination of all three. In any case, amid all the financial and political turmoil in Europe, it marks another arena in which Germany appears to be taking a rather nationalistic path, disregarding the efforts of the rest of European member states, which stand to lose tens of billions of Euros in revenues if the tax haven sabotage is successful.

Schäuble appears to be gaining a source of perhaps unwitting support from the German media, which has so far largely (with the odd exception) failed to pick up on Germany’s decisive shift onto the side of the tax havens, and which appears to have greeted Semeta’s powerful letter on March 5th with silence.

Austria, meanwhile, appears to be taking as cynical position as it ever has. Andreas Schieder, Austria’s State Secretary of Finance, had this to say:

“We cannot wait until all the tax issues between the EU and Switzerland have been dealt with. They have had 20 years to do this, and this is certainly far too long for us.”

Which is interesting. What Schieder omitted to mention was that one of the main reasons for delay has been that Austria and Luxembourg have been blocking progress inside Europe!

In an open letter to Finance Ministers and EU Permanent Representatives on March 6th, the Tax Justice Network called Germany’s actions “unacceptable” and called on EU governments to “stand up against Germany’s position.”

Endnote 1: if any evidence is needed on just how very bad the original Rubik deals are, click here.

Endnote 2: a lot of media stories (such as this one) have falsely given the impression that because Germany and the UK have agreed to the Commission’s demands that they must renegotiate their Rubik deals, and that the sticking point has been the tax rate specified under the German deals, and that this effectively irons out the problems. That is false: the tax rate is a distraction. The changes that the EU Commission is referring to is “drop everything in Rubik that overlaps with the EUSD and its future amendments.” To repeat: if they do accept the European Commission’s demands, as is right (and as seems likely,) then the whole point of Rubik disappears.